There is one tax break for divorcees

What’s needed for payments to an ex to qualify as tax-deductible

By

BillBischoff

If your marriage disintegrates and you’re required to make payments to your ex, it’s a big help if you can treat some or all of them as tax-deductible alimony. On the other side of the coin, amounts you’re allowed to deduct as alimony must be reported as taxable income by your ex. So if you’ll be the recipient of alimony payments, you need to know that. This is all fair enough, and it’s pretty simple in the abstract. What’s not so simple is meeting the tax-law requirements for deductible alimony in real-life situations. Here’s the scoop on what’s needed for payments to an ex to qualify as tax-deductible alimony.

Requirements for Deductible Alimony

For any payment (whether it’s a one-time payment or part of a series of payments) to be treated as deductible alimony for federal income tax purposes, all seven of the following requirements must be met.

The payment must be pursuant to a written divorce or separation agreement.

The payment must be made to or on behalf of your ex. Payments to third parties, such as attorneys and mortgage lenders, are okay if they are made on behalf of your ex pursuant to the divorce or separation agreement or at the written request of your ex.

The obligation to make the payment must cease if your ex dies. Failure to meet this requirement is probably the most common cause of lost alimony deductions.

The payment must be in cash or cash equivalent.

The payment cannot be considered child support.

The divorce or separation agreement cannot say the payment is not alimony.

After you are divorced or legally separated, you and your ex cannot live in the same household or file a joint Form 1040.

Only payments that meet all these requirements count as deductible alimony. Payments that fail to meet all these requirements are treated as either part of the divorce property settlement or as child support—both of which are nondeductible for you and tax-free for your ex.

Avoiding Unintended Child Support

As I said earlier, payments to your ex that are considered child support cannot be deductible alimony.

Fixed Child Support: Fixed child support means payments that are designated as child support in the divorce or separation agreement. Simple enough!

Deemed Child Support: Deemed child support payments are harder to spot, but they are just as nondeductible. Payments are considered deemed child support to the extent of future payment reductions that are triggered by any of the following child-related events:

Attaining age 18, 21, or the age of majority under local law.

Death of the child.

Marriage of the child.

Completion of the child’s schooling.

The child leaving the household.

The child attaining a specified income level or becoming employed.

Example: Say your divorce decree requires you to pay $3,500 per month to your ex who has primary custody of your 10-year-old child. When the child turns 18, your monthly payment obligation is reduced from $3,500 to $1,800. Under the rules I just explained, $1,700 of each and every monthly payment must be treated as nondeductible deemed child support, because there will be a $1,700 payment reduction when your child turns 18. In other words, starting on Day One, you can only deduct $1,800 per month as alimony ($3,500 to $1,700), assuming your payments meet all the other requirements for deductible alimony. The remaining $1,700 of each and every monthly payment is nondeductible deemed child support.

To make things even more complicated, payments that are reduced within six months before or after a child reaches age 18, 21, or the local age of majority are also treated as deemed child support. Finally, when there are two or more children and payments are to be reduced on two or more dates, you are even more likely to find that payments you thought were deductible alimony must be treated as nondeductible deemed child support.

For additional information on what constitutes deemed child support, see IRS Publication 504 (Divorced or Separated Individuals) at www.irs.gov.

Avoiding Alimony Recapture

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Let’s assume you’ve cleared all the hurdles explained so far for payments to be deductible alimony. Great, but there’s still one more to go: the so-called alimony recapture rule. Under this rule, you must make a calculation to figure whether your deductible alimony payments are excessively “front-loaded” during the first two calendar years. If they are, you must recapture in the third year some of the deductions you claimed in the first two years. In other words, you must report the recaptured amount as taxable income on your Form 1040 for the third year. Correspondingly, you ex gets to claim a deduction for the recaptured amount on his or her return for that year. Rather than go into a lengthy and confusing explanation of when amounts will or will not run afoul of the alimony recapture rule, I recommend filling out Worksheet 1 in the aforementioned IRS Publication 504. It’s quick and easy. Please do this before locking in payments to your ex by signing off on the divorce papers.

The Bottom Line

Just calling payments to your ex deductible alimony in the divorce papers won’t get the job done. Instead, you must jump through tax-law hoops to secure the anticipated deductions. Plus you’ll need to spread out the payments to avoid the alimony recapture rule. Hiring a tax pro with lots of experience in divorce-related tax matters is a good idea when significant dollars are at stake. Many divorce attorneys lack the required tax expertise, although they may be unwilling to admit it.

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